Category Archives: US

Certain things can be proven statistically, even if the cause is unknown.

Consider what happens when your roll a pair of dice. There are 36 possible combinations, e.g., (1 + 1), (3 + 4), (6 + 5). Only one combination—(1 + 1)—produces an outcome of 2. Therefore, you can expect to roll a 2 only one out of 36 times, on average. On the other hand, six combinations produce an outcome of 7— (1 + 6), (2 + 5), (3 + 4), (4 +3), (5 + 2), (6 + 1). Accordingly, you can expect to roll a 7 once in every six rolls, on average. The table below shows the number of times each outcome should occur in 100,000 rolls.

If the results of your dice-rolling experiment diverge from these figures by more than a tiny, tiny bit you can be certain that you were not using fair dice. (We rule out the possibility of psychokinesis.) Note as well that the results do not tell you why the dice were not fair. There may have been a defect in the manufacturing process. Alternatively, someone may have “fixed” the dice by loading, shaving, or some other method. Whatever the cause, the fact that the dice are not fair is incontrovertible, given the laws of probability and the very large number of trials.
Let us now consider price moves on bonds. Unless something unusual is going on, a histogram of monthly price changes should produce a bell-shaped curve as in the illustration (non-bond-related) below (see note 1). This pattern is intuitive to seasoned market participants: In most months, prices go up or down by about an average amount. Once in a while the price change is much greater or much smaller than average. Even more infrequently the monthly price change is very much greater or smaller than average. (By the way, this same reasoning applies to total returns. We confirmed that our key result holds for total returns as well as price changes.)

The notion that price moves should follow a normal distribution is not a matter of academic theorizing with no connection to the real world. According to the math that formally describes the bell-shaped curve, price changes in 68.2% of all months in the sample of observations should fall in a range of plus/minus one standard deviation from the mean (simple average) return. Price changes between one and two standard deviations greater than the mean or between one and two standard deviations smaller than the mean should account for 27.2% of the months. That leaves 4.6% of all months in which to expect price moves more than two standard deviations above or below the mean. In the top panel of the table below, we apply those percentages to the 372 months in our 1987–2017 observation period to predict how many months will be found in each of those three ranges, if the monthly price changes are in fact normally distributed.

In the case of investment-grade corporates, the actual distribution among the three ranges almost perfectly matches the predicted distribution—253/101/18 versus 254/101/17. That result should lay to rest any notion that the normal distribution is just a theoretical model of how the things would work in an idealized world. Investment-grade corporate behavior demonstrates that following a bell-shaped curve with a specific mathematical description is how the real world works.

Government bonds (Treasuries and agencies) veer a bit more from the predicted distribution. All told, 125 months lie outside the range of plus/minus one standard deviation versus the predicted total of 118. Note that research has found that sort of pattern in equity returns, popularly referred to “fat tails.” That abnormality is commonly attributed to momentum trading. The notion is that instead of settling down to normal swings after major positive or negative news comes into the market, stocks continue to gyrate wildly without any additional, major news hitting the market, thanks to aggressive traders who jump on the recent trend and overpower value-oriented traders.

High-yield bonds display the opposite sort of abnormality. Instead of having too many extreme moves, the asset class has too few. Prices in just 83 months moved up or down by one standard deviation or more, some 30% less than the predicted count of 118. The “missing” months were all in the plus/minus 1–2 standard deviations range—just 64 actual versus 101 predicted. Extreme observations of plus/minus 2 standard deviations or more were about right—19 actual versus 17 predicted.

These are not inconsequential divergences from the standard bell curve. With the statistical technique known as the Jarque-Bera(JB) test we can confirm that the data shown for the ICE BAML High Yield Index do not represent a normal distribution. The calculation produces a very high JB value indicative of non-normality and a p-value far below 0.01. Similarly non-normal are the distributions shown, in the second panel of the table, for the BB, B, and CCC-C sub-indexes. Of the three, the BB sub-index is the most overconcentrated in the plus/minus 1 standard deviation range—202 actual months versus 172 predicted.

Why are high-yield price moves not normally distributed?
If a dice-rolling experiment fails to produce the predicted distribution of outcomes, as discussed above, we know that the dice are not fair. That information does not explain why the dice are not fair, that is, whether the manufacturing process was defective or whether somebody altered them. Similarly, the fact that price changes on the high-yield index are not normally distributed does not tell us why they are not normally distributed. We can, however, generate hypotheses and, to the extent feasible, test them.

One hypothesis we thought of is that the Federal Reserve has created an artificially stable financial environment through its quantitative easing (QE) policy. The third and fourth panels of the table display the results of our test of this hypothesis. They show far fewer months outside the plus/minus one standard deviation range in both the pre-QE era (42 actual versus 84 predicted) and the QE era (25 actual versus 35 predicted). The JB test confirms that in both sub-periods the distributions are non-normal. In short, we can reject the hypothesis that quantitative easing artificially stabilized the high-yield market, resulting in fewer extreme monthly price changes than ought to have been observed. If anything, high-yield price changes have been closer to normal during the QE period. (Note that the pre-QE versus QE testing is based on means and standard deviations within those sub-periods.)

We have come up with only one other hypothesis to explain the shortfall of extreme price changes in the high-yield market. Other market participants may find it unpalatable and propose other possible explanations. We encourage discussion and debate on this topic.

Our remaining hypothesis is that reported prices understate the high-yield market’s true volatility. This does not necessarily imply that traders are deliberately understating the magnitude of price declines during major market declines, although we cannot readily disprove that possibility.

Understatement of price declines could also result from good-faith efforts to mark to market the many issues that do not trade in any given month.
Note that if price declines are understated in downturns, price rises will be understated in subsequent upturns. This can explain why in the underlying data we find a shortfall of large up moves as well as a shortfall of large down moves. Also, as noted above, the shortfall of extreme high-yield price changes was entirely in the plus/minus 1 to 2 standard deviations range. We might reasonably infer that the flaw in high-yield pricing, whatever it turns out to be, understates price changes in “somewhat extreme” market declines, but cannot hide the most massive sell-offs.

Our finding of a non-normal distribution of high-yield price changes, with fewer extreme changes than are expected to occur in a properly functioning market, has important implications for asset allocation. It implies that the index-derived standard deviations and, by extension, Sharpe ratios that institutional investors are using to evaluate the high-yield asset class paint too rosy a picture of its risk-reward ratio. Further exploration of this important question seems warranted.

The default rate of the S&P/LSTA Leveraged Loan Index jumped to its highest level in three years after iHeartMedia, one of the largest highly levered remnants still standing from the LBO boom, filed for Chapter 11 bankruptcy protection.

The radio giant’s highly anticipated filing included $6.3 billion of Clear Channel term loans, propelling the rate to 2.42%, from 1.7% previously, and marking the fifth largest default in the history of the Leveraged Loan Index.

Though significantly higher than the 18-month low of 1.36% where it stood the end of July 2017, the current rate still remains well inside the 3.1% historical average.

By number of issuers, the default rate is now 1.93%, from 1.94% at the end of February.

As the table below shows, all but one of the 10 largest S&P/LSTA Index defaults on record were products of the 2006/2007 credit boom, or in the case of Energy Future Holdings and Caesars, the resultant LBO boom.

For iHeart’s part, the media giant, formerly known as Clear Channel, filed for Chapter 11 in bankruptcy court in Houston after more than a year of negotiations with its creditors with an agreement in principle to cut its $20 billion debt load by half.

According to a Form 8-K filed with the Securities and Exchange Commission, the company said it expects to formally enter into a restructuring support agreement “in short order.” Court filings show an early challenge from the legacy, pre-LBO noteholder group, is expected to the proposed restructuring deal. (See “iHeart files Chapter 11, sees challenge from legacy noteholder group,” LCD News, March 15, 2018).

As with almost all of its $20 billion debt pile, Clear Channel’s $5 billion D term loan due 2019 (L+675) and $1.3 billion E term loan (L+750) were put in place as part of the company’s 2008 buyout by Bain Capital and Thomas Lee Partners, and extended in 2013.

Finally, following iHeart’s bankruptcy filing, the default rate within the broadcast radio and television sector jumped to 33.59% by amount, from 7.23% previously.

For context, Ocean Rig and Answers Corp. rolling off the calculation has partially offset the impact of iHeart’s default, with the default rate falling from 2% at the end of February, to 1.60% at the beginning of this month upon the removal of the two issuers, and prior to this month’s defaults from iHeartMedia and Harvey Gulf. — Rachelle Kakouris

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

This event will be held at S&P Global U.S. headquarters at 55 Water Street in Manhattan on March 27, at 4 pm EDT, and will be followed by a cocktail reception. Space is limited so kindly register by March 20.

Community Health Systems disclosed in a presentation to lenders today that it plans to address its most pressing debt maturities with an uptier exchange. The company added that once the exchange and announced term loan amendment — which among other things seeks to increase its junior secured debt capacity — are completed, it will then seek to extend or refinance its $1 billion term loan G coming due in 2019.

The hospital operator also revealed it has retained Citi, Credit Suisse, JP Morgan, and Lazard as financial advisors. As reported ($), Community Health’s near-term bonds sold off by as much as 4.75 points after news circulated yesterday of the Lazard hire.

The company’s $1.2 billion issue of 7.125% notes due 2020 and its $1.925 billion issue of 8% unsecured notes due November 2019, which becomes current this November, slumped anew in active trading this morning, falling 3.5 points, to 78.5, and four points, to 88, respectively. Community Health’s G term loan due 2019 was down about an eighth a point this morning, at 98.375/99.

The company last month amended its credit facility to remove an EBITDA to interest ratio covenant and replace a senior secured net leverage covenant with a first-lien net leverage covenant, and also to reduce revolving commitments to $650 million, from $840 million. Sources at the time noted that the company’s shift to a first-lien net leverage covenant raised eyebrows about whether the issuer is attempting to open the door to a refinancing or an exchange offer into second-lien debt.

S&P Global Ratings yesterday downgraded Community Health’s corporate credit rating to CCC+, from B–, citing weaker than expected cash flow guidance for 2018 and refinancing concerns in light of the large debt maturities the company needs to manage over the next few years.

“We believe refinancing risk is elevated, particularly given the company’s significant ongoing transformation efforts,” analyst David Peknay said in the ratings report.

Community Health Systems is a Franklin, Tenn.–based operator of general acute-care hospitals and outpatient facilities in communities across the U.S. — Rachelle Kakouris/James Passeri

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

While tough marketing conditions this week have sidelined many prospective issuers, McDonald’s Corp. today launched a $1.5 billion, three-part offering, after inking a similar structure one year ago. The new offering was split evenly across $500 million each of five-year notes due April 1, 2023 at T+75, 10-year notes due April 1, 2028 at T+100, and a tap of the existing 4.45% notes due March 1, 2047 at T+140, sources said. Launch levels imply reoffer yields of roughly 3.35%, 3.81%, and 4.46%, respectively.

McDonald’s launched the deal at the firm end of guidance (which was set in the areas, plus or minus five basis points, of T+80, T+105 and T+145), and 15–20 bps through early whispers. Even so, McDonald’s appears on track to pay 5–10 bps of new-issue concession to clear today’s offering in heavy markets.

The 4.45% 2047 tap is projected to be placed at a yield close to the coupon rate. The deal was originally printed in March 2017 as a $550 million offering at T+137, or 4.48%. The issue traded earlier today at a G-spread of 142 bps, or roughly 10 bps higher than levels on Monday, according to MarketAxess.

That 30-year tranche was part of a $2 billion, three-part deal that also included 2.625% five-year notes due January 2022 at T+62, or 2.639%, and 3.5% 10-year notes due March 2027 at T+107, or 3.562%. For reference, the 2022 issue changed hands this morning G-spreads from 58–60 bps, before accounting for roughly six basis points on the curve, and the 2027 notes traded last week at G-spreads in the area of 86 bps, and roughly three basis points wider today, trade data show.

Cautious marketing of the new bonds follows on a staggering $64.2 billion of high-grade offerings placed over the five sessions through Monday, including big M&A deals inked by CVS Health last Tuesday ($40 billion, or the third largest corporate offering on record) and Campbell Soup on Monday ($5.3 billion). That rolling sum was less than $5 billion shy of the of the all-time record for any five-day period, or the $68.8 billion placed in the five sessions around a $46 billion M&A-driven behemoth inked by Anheuser-Bush InBev in January 2016, according to LCD.

At the tail end of the latest issuance deluge, borrowers on Monday paid roughly 12 bps in new-issue concessions, on average, rivaling the extra costs witnessed in the immediate aftermath of the shock Brexit vote in June 2016.

Proceeds from today’s offering will be used for general corporate purposes. Of note, the company has $750 million of 2.1% notes coming due on Dec. 7, 2018, followed by $400 million of 5% notes due in February 2019, according to S&P Global Market Intelligence.

In March 2017, the company announced that it would return $22–24 billion of cash to shareholders through 2019. Last July, it announced a new $15 billion share-repurchase program, which does not have a specified expiration date. McDonald’s in 2016 completed an accelerated share-repurchase program and bought back a total of $11.2 billion of its shares over the calendar year. That was up from $6.1 billion in 2015, and is by far the most in the company’s history, according to S&P Global Market Intelligence. Buybacks in 2017 amounted to $4.7 billion.

In December 2017, Fitch affirmed its BBB rating on the company. “McDonald’s ratings balance its shareholder-friendly financial strategy with its substantial cash flow, significant scale, improved comparable sales (comps), and Fitch’s view that the company will maintain total adjusted debt/EBITDAR in the mid-to-high 3.0x range while generating FCF of about $1 billion or more annually,” analysts said.

S&P Global Ratings maintains a BBB+ rating for the company. “We also believe McDonald’s will moderate share repurchases over the longer term while continuing to work to return revenue growth and customer traffic. We assume the company will maintain leverage of less than 4x, supported by the range of initiatives that began in 2015. Still, the competitive environment is fierce for the quick service restaurant sector overall,” the agency said in ratings rationale published in April 2017. — Gayatri Iyer/ John Atkins

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

The share of LBO loans with debt/EBITDA of at least six times – a level specified by Federal agencies in 2013 as meriting “special concern” – has just reached its highest point since the financial crisis, according to LCD.

The surge in these deals comes amid sustained institutional investor demand for higher-yielding assets. Consequently, lenders and investors have been accommodating to leveraged loan issuers of all stripes over the past few years, doling out covenant-lite credits and rapid repricings in record fashion.

Leveraged lending guidelines for U.S. banks, laid out by Federal agencies in 2013, have returned to the headlines of late, most recently when Comptroller of the Currently Joseph Otting said that banks “have the right to do what [they] want” regarding leveraged lending (as long as those actions don’t impact “safety and soundness,” that is).

Those guidelines stated that loans with debt to EBITDA of six times or more would merit special concern, prompting banks under the watchful eye of the Fed to pull in the reins on highly leveraged deals.

To a degree, anyway. Turns out, leverage on loans backing U.S. LBOs have been creeping higher over the past several years, to the point where roughly 53% of LBOs for large corporate borrowers had pro forma leverage of 6x or higher so far this year, a post-crisis high (2014 came close, at 52%). For reference, 2007 continues to hold the record, when 61% of buyouts fell into this category. – Tim Cross

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Debt backing Neiman Marcus Group shot up today after the company posted financial results that bested analyst expectations due to better sales at its stores that it partly attributed to increased tourism and the oil patch recovery.

The issuer’s term loan due October 2020 (L+325, 1% LIBOR floor) was bracketing 90 this morning, up roughly two-to-three points since yesterday, sources said.

With the company remaining vague on its intentions to pay its interest in kind past the April 15 coupon date, the Neiman Marcus $628 million issue of 8.75%/9.50% senior PIK toggle notes due 2021 rallied more than eight points to a 14-month high of 68.75.

In an effort to preserve liquidity, the company previously elected to pay interest for the period to Oct. 14 in the form of more debt.

The company’s $960 million issue of 8% cash-pay notes due 2021 gained as much as 5 points, to 69.

The retailer today reported $1.48 billion in sales for its fiscal second quarter ended Jan. 27. The performance was up 6.2% from the year-ago equivalent period and above the $1.47 billion estimate cited in a note from Citi analyst Jenna Giannelli. Adjusted EBITDA for the quarter came in at $155 million, ahead of Citi’s $144 million projection and up roughly 22% from the same period last year.

Company executives in a conference call this morning cited improvements in the oil patch, which contributed to better operating results at its Texas stores, and increased tourism to its locations during the holiday season as some of the reasons behind the solid numbers.

On the call today, CEO Geoffroy van Raemdonck said the company has now recorded two straight quarters of sales increases for the first time since fiscal 2015, and that its online business now accounts for more than 34% of total revenue.

“I think we’re extremely comfortable with our liquidity providing us with sufficient funds to fund our operations as well [as] strategic initiatives,” Stapleton said, according to a transcript from S&P Global Market Intelligence. “So I think that’s one critical point. I think the second critical point is that with the maturity ladder of our debt, we don’t see the first maturities until October of 2020. And so given where we sit today, we believe that we have sufficient kind of runway to kind of think about our debt, our capital structure in a very thoughtful, deliberative and prudent way. Throughout kind of the downturn, I think we have been very active in managing our liquidity, and we will be active and proactive in managing through kind of our capital structure.”

Current CEO van Raemdonck joined the company earlier this year after Karen Katz stepped down from her post.

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

U.S. high-yield funds recorded an outflow of roughly $525 million for the week ended March 7, according to weekly reporters to Lipper only. It’s the eighth consecutive week of exits, for a total outflow of $16.6 billion over that period, which ranks as the largest high-yield outflow streak on record.

ETFs drove this week’s exit, with an outflow of roughly $349 million, while roughly $176 million was pulled from mutual funds.

The total outflow so far this year is now $13.7 billion.

The four-week trailing average narrowed to negative $2 billion, from negative $2.5 billion last week.

The change due to market conditions this past week was a decrease of $484 million. Total assets at the end of the observation period were about $192.7 billion. ETFs account for about 23% of the total, at $44.2 billion. — James Passeri

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

CVS Health (NYSE: CVS) has announced the structure for its jumbo benchmark offering of SEC-registered senior notes as an offering in as many as nine parts, as the company seeks debt financing for the roughly $47.9 billion cash portion of the purchase price for its mammoth acquisition of Aetna (NYSE: AET). Based on the remaining bridge financing, the deal is on track to become at least the third largest corporate placement on record, according to LCD.

Early whispers are out in the T+110 area for two-year notes due March 9, 2020 and in the T+120 area for three-year notes due March 9, 2021, and at the LIBOR equivalents for same-dated FRNs for both tenors. Whispers started in the T+140 area for five-year notes due March 9, 2023, the T+160 area for seven-year notes due March 25, 2025, the T+175 area for 10-year notes due March 25, 2028, the T+200 area for 20-year bonds due March 25, 2038, and the T+215 area for 30-year bonds due March 25, 2048.

For reference, the issuer’s 2.875% notes due 2026 traded this morning at T+128, or a G-Spread of 133 bps, and its 5.125% bonds due 2045 traded at T+178. Reflecting the expected new-issue concessions required to clear the blockbuster M&A financing, the outstanding notes are 30–40 bps wider since the end of January, after speculation mounted that CVS would tap the bond markets sooner than later. The issuer’s 3.5% notes due July 2022 traded this week at T+100 and its 4% notes due December 2023 at T+122, both roughly 25–30 bps wider since the end of January.

The company last week tapped active bookrunners Barclays, BAML, Goldman Sachs, and J.P. Morgan to arrange fixed-income calls on Friday, March 2, and Monday, March 5. Wells Fargo is passive bookrunner.

All but the 30-year tranche of today’s offering are subject to a special mandatory redemption, at 101, in the event the merger does not close by Sept. 3, 2019. The merger was slated to close in the second half of this year, pending regulatory approvals. The issues are all subject to make-whole call provisions, and the 2023–2048 issues carry standard tenor-specific par calls prior to maturity. All tranches are subject to change-of-control put provisions.

The $77 billion price tag for the Aetna play includes the assumption of roughly $9 billion of Aetna debt. The bond effort comes after CVS in December obtained a $5 billion unsecured A term loan from a group of 20 banks backing the M&A play. Barclays, Goldman Sachs, Bank of America Merrill Lynch, J.P. Morgan, and Wells Fargo acted as joint lead arrangers. Barclays is administrative agent. As a result of the term loan agreement, the size of the $49 billion M&A bridge facility was reduced by $5 billion.

In terms of the biggest corporate offerings on record, the top spots are held by Verizon, which placed $49 billion of notes in September 2013 to round out its ownership of Verizon Wireless, and Anheuser-Busch InBev, which printed a $46 billion trade in January 2016 for its SABMiller buy. AT&T last July placed the third-largest deal at present, with a $22.5 billion offering to support its bid for Time Warner. Actavis Funding inked $21 billion in March 2015 for its Allergan acquisition, and Dell/EMC placed $20 billion of notes in May 2016.

CVS’ own $15 billion offering in July 2015—to back its acquisitions of Omnicom and Target’s pharmacy business—is among the 20 largest corporate deals on record.

Five-year CDS referencing CVS debt was indicated at 68 bps this week, roughly in line with indications around the time of the CVS/Aetna M&A announcement in early December last year, and up from an interim low of 58 bps at the start of 2018, according to Markit.

The present BBB+/Baa1 ratings on CVS are under review for downgrade. Aetna’s A grade at S&P Global is under review for downgrade, while Moody’s on Dec. 4 affirmed its lower Baa2 rating and stable outlook on Aetna.

CVS last week disclosed a financial update related to the Aetna transaction, and noted glowing press characterizations of its performance this week before the House Subcommittee on Regulatory Reform, Commercial and Antitrust Law.

“We believe that this transaction, through better pharmacy care and coordination with primary care professionals, can make a significant dent in reducing health care costs,” CVS general counsel Thomas Moriarty told the committee. “Put simply, to make real progress on behalf of consumers, and the health care system, we have to break the current logjam.” — John Atkins

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.